Cronos Group (NASDAQ:CRON) had a remarkable week in the markets, which should surprise no one. As a marijuana-related investment, CRON stock is liable to make insane moves. Fortunately for long-side speculators, shares moved in the right direction. But just how sustainable is this swing?
To answer that question, let’s first discuss the catalyst. On Wednesday, CRON stock closed up almost 12% above the prior day’s session when management announced a landmark deal with custom-microbe producer Ginkgo Bioworks. Under the terms of the contract, Ginkgo will aid in the production of cannabinoid (CBD) strains. In return, Cronos will offer its equity shares in tranches as Ginkgo achieves specific milestones.
The implications behind the deal are profound. CBDs represent the non-psychoactive compound found in the cannabis plant. Unlike the delta-9 tetrahydrocannabinol (THC), CBD doesn’t produce the “high” most commonly associated with marijuana. Thus, a person can consume CBD products without fear of losing sobriety.
Of course, the joke is, what’s the point? More specifically, how does this relate to Cronos Group stock?
As you know, one of the contentious elements within the legal marijuana debate is medical cannabis. Weed proponents argue that marijuana’s classification as a Schedule I drug prevents medical patients from access to natural cures. The opposition has traditionally stated that CBDs don’t offer valid medical benefits; therefore, the legalization movement is merely a front for recreational marijuana.
The discovery of CBDs severely defanged the cannabis debate’s morality angle. Furthermore, medical-cannabis patients currently use CBDs to alleviate symptoms associated with post-traumatic stress disorder, epilepsy, Crohn’s disease and multiple sclerosis.
Given Ginkgo’s biologics expertise, Cronos Group could possibly open many other medicinal uses. In that case, CRON stock is much more valuable than its current price. Investors must decide, though, if it’s worth the hype.
Positive Fundamentals Should Lift CRON Stock, But Significant Risks Exist
As a marijuana play, Cronos Group stock has tremendous upside potential. Consider that a decade ago, the idea of cannabis investments symbolized sheer lunacy. Even today, large segments of society adamantly oppose legalization, so the sector’s infrastructure remains in the infancy stage.
Therefore, we shouldn’t be surprised that any positive news would catalyze a massive swing in CRON stock. Readers may recall that early last month, I discussed Cronos Group’s upside potential. In particular, management’s push to be listed on the Nasdaq provided a credibility boost. And for the record, CRON is up 112% since my article’s publication date.
Plus, the Ginkgo deal isn’t the only catalyst recently driving CRON stock. A few weeks ago, Bloomberg reported that alcoholic-beverage maker Diageo (NYSE:DEO) sought a deal with Canadian cannabis companies. This news aligns with industry trends. Constellation Brands (NYSE:STZ) owns a significant stake in Canopy Growth (NYSE:CGC), while Molson Coors Brewing (NYSE:TAP) signed a joint venture with Hydropothecary (OTCMKTS:HYYDF).
That said, significant risks cloud all marijuana-related equity shares, including Cronos Group stock. Typically, the biggest threat is found in the financials. To its credit, Cronos Group has relatively solid numbers. But the counterargument is that the numbers are small. For example, the company is on pace for a banner year, at an eyebrow-raising low amount of $5.4 million.
Marijuana’s technical success has also attracted unwanted attention, namely notorious short-seller Andrew Left. His company, Citron Research, recently published a “reality check” against CRON stock. Citron’s main contention is that the company doesn’t disclose the size of its provincial agreements in its native Canada. This lack of disclosure clashes with its rivals’ business practices.
Sure enough, the markets walloped Cronos Group stock on Aug. 30. From an opening price of $12.09, it closed at $9.12.
Practicalities Determine Your Options With Cronos Group Stock
In short, CRON stock is a classic high-risk, high-reward affair. Is the recent swing both sustainable and justified? The underlying firm absolutely has the potential to drive forward further gains. Both the science of CBDs and the legal backdrop ultimately favor CRON longer-term.
On the flipside, you absolutely cannot ignore the risks. Andrew Left attacked the marijuana sector, but many Andrew Lefts exist. Since this is a fresh market, I’m not sure how strong-willed the bulls are. You just saw what a lone short-seller did to Cronos Group stock. Now imagine several short-sellers with deep pockets.
Finally, ideas on how to proceed are relative to individual circumstances. In this case, if you had bought CRON stock in early August, by all means, take profits. You’re up twice your money in a little over a month. What are you waiting for?
But if you haven’t yet touched CRON stock, my idea is to wait. I realize we’re talking about wild marijuana investments, but this has gone up too far, too fast. Let the inevitable correction sink in, and then consider buying at a discounted rate.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.